Wednesday, March 11, 2009

La hipotesis no es nueva:"The economics profession appears to have been unaware of the long build-up to the current worldwide financial crisis and to have significantly underestimated its dimensions once it started to unfold. In our view, this lack of understanding is due to a misallocation of research efforts in economics. We trace the deeper roots of this failure to the profession’s insistence on constructing models that, by design, disregard the key elements driving outcomes in real-world markets. The economics profession has failed in communicating the limitations, weaknesses, and even dangers of its preferred models to the public. This state of affairs makes clear the need for a major reorientation of focus in the research economists undertake, as well as for the establishment of an ethical code that would ask economists to understand and communicate the limitations and potential misuses of their models.......We believe that economics has been trapped in a sub-optimal equilibrium in which much of its research efforts are not directed towards the most prevalent needs of society. Paradoxically self-reinforcing feedback effects within the profession may have led to the dominance of a paradigm that has no solid methodological basis and whose empirical performance is, to say the least, modest. Defining away the most prevalent economic problems of modern economies and failing to communicate the limitations and assumptions of its popular models, the economics profession bears some responsibility for the current crisis. It has failed in its duty to society to provide as much insight as possible into the workings of the economy and in providing warnings about the tools it created. It has also been reluctant to emphasize the limitations of its analysis. We believe that the failure to even envisage the current problems of the worldwide financial system and the inability of standard macro and finance models to provide any insight into ongoing events make a strong case for a major reorientation in these areas and a reconsideration of their basic premises."

Justin Wolfers comenta sobre el paper en el blog de Freakonomics:"The claim is that academic macroeconomists have become mired in a particularly fruitless equilibrium, in which each is engaged in the search for ever-greater levels of formal elegance, at the expense of empirical relevance. There’s definitely something to this.Today’s macroeconomists write for other macroeconomists. If you aren’t using the right tools, you aren’t part of the club."

"The more I look at empirical results, the closer appear the flaws of a data-centric worldview. Data never speak for themselves, and the process of their interpretation is every bit as political as other forms of analysis. But when you analyze data, you focus on the minutae of your dataset, so you're further divorced for the subject matter. You can make all sorts of crazy claims that would never slide if you were forced to present your views in a clear manner in front of a lay-audience remotely familiar with the subject matter.The problem is that empirical claims are generally accepted or rejected on the basis of statistical tests meeting a certain treshold. But creating such a treshold gives researchers a pole to vault; when they manage to do so, they publish, when they don't, they do not publish. Instead of statistical tests revealing anything about the state of the world, they only reveal what researchers could torture the data into saying.

Brad DeLong makes the case that virtually all economic hypotheses are wrong, and the results from other meta-analyses are also worrying."

"So what is modern economics about? It seems to be, mainly, about itself: The AEA meets to celebrate the importance of its members, their presence in high public positions, their influence in foreign lands, and the winning of the Nobel Prize. Female and black members have won the right to organize sessions about gender and race--thus domesticating some of those who might otherwise complain. Radicals and Keynesians, on the other hand, appeared only on panels organized separately, by an alphabet soup of splinter associations. What was therefore most conspicuously missing from this meeting of America's premier social science organization, was any actual discussion of economic ideas.....Leading active members of today's economics profession, the generation presently in their 40s and 50s, have joined together into a kind of politburo for correct economic thinking. As a general rule--as one might expect from a gentleman's club--this has placed them on the wrong side of every important policy issue, and not just recently but for decades. They predict disaster where none occurs. They deny the possibility of events that then happen. They offer a "rape is like the weather" fatalism about an "inevitable" problem (pay inequality) that then starts to recede. They oppose the most basic, decent, and sensible reforms, while offering placebos instead. They are always surprised when something untoward (like a recession) actually occurs."

"We are good at fitting explanations to the past, all the while living in the illusion of understanding the dynamics of history.

My claim is about the severe overestimation of knowledge in what I call the " ex post" historical disciplines, meaning almost all of social science (economics, sociology, political science) and the humanities, everything that depends on the non-experimental analysis of past data. I am convinced that these disciplines do not provide much understanding of the world or even their own subject matter; they mostly fit a nice sounding narrative that caters to our desire (even need) to have a story. The implications are quite against conventional wisdom. You do not gain much by reading the newspapers, history books, analyses and economic reports; all you get is misplaced confidence about what you know. The difference between a cab driver and a history professor is only cosmetic as the latter can express himself in a better way.

There is convincing but only partial empirical evidence of this effect. The evidence can only be seen in the disciplines that offer both quantitative data and quantitative predictions by the experts, such as economics. Economics and finance are an empiricist's dream as we have a goldmine of data for such testing. In addition there are plenty of "experts", many of whom make more than a million a year, who provide forecasts and publish them for the benefits of their clients. Just check their forecasts against what happens after. Their projections fare hardly better than random, meaning that their "stories" are convincing, beautiful to listen to, but do not seem to help you more than listening to, say, a Chicago cab driver. This extends to inflation, growth, interest rates, balance of payment, etc. (While someone may argue that their forecasts might impact these variables, the mechanism of "self-canceling prophecy" can be taken into account). Now consider that we depend on these people for governmental economic policy!......If you look closely at the data to check the reasons of this inability to see things coming, you will find that these people tend to guess the regular events (though quite poorly); but they miss on the large deviations, these " unusual" events that carry large impacts. These outliers have a disproportionately large contribution to the total effect.Now I am convinced, yet cannot prove it quantitatively, that such overestimation can be generalized to anything where people give you a narrative-style story from past information, without experimentation. The difference is that the economists got caught because we have data (and techniques to check the quality of their knowledge) and historians, news analysts, biographers, and "pundits" can hide a little longer."

Sunday, March 08, 2009

" In recent years economists and journalists alike have been heavily emphasizing a new concept—“growth,” and much eco­nomic writing is engaged in a “numbers game” on what per­centage, or “rate of growth,” “we” should have next year or in the next decade. The discussion is replete with comparisons of the higher rate of country X which “we” must hurriedly counter, etc. Amidst all the interest in growth, there are many grave prob­lems which have hardly been touched upon. First and foremost is the simple query: “What is so good about growth?” The econ­omists, discoursing scientifically about growth, have illegitimately smuggled an ethical judgment into their science—an ethical judg­ment that remains unanalyzed, as if it were self-evident. But why should growth be the highest value for which we can strive? What is the ethical justification? There is no doubt about the fact that growth, taken over as another dubious metaphor from biology, “sounds” good to most people, but this hardly constitutes an ade­quate ethical analysis. Many things are considered as good, but on the free market every man must choose between different quantities of them and the price for those forgone. Similarly, growth, as we shall presently see, must be balanced and weighed against competing values. Given due consideration, growth would be considered by few people as the only absolute value. If it were, why stop at 5 percent or 8 percent growth per year? Why not 50 percent?

It is completely illegitimate for the economist qua economist simply to endorse growth. What he can do is to contrast what growth means in various social conditions. In a free market, for example, every person chooses how much future growth he wants as compared to present consumption. “Growth,” i.e., a rise in future living standards, can be achieved, as we have implicitly made clear throughout this volume, only in a few definable ways. Either more and better resources can be found, or more and better people can be born, or technology improved, or the capital goods structure must be lengthened and capital multiplied. In practice, since resources need capital to find and develop them, since technological improvement can be applied to production only via capital investment, since entrepreneurial skills act only through investments, and since an increased labor supply is rela­tively independent of short-run economic considerations and can backfire in Malthusian fashion by lowering per capita output, the only viable way to growth is through increased saving and investment. On the free market, each individual decides how much he wants to save—to increase his future living standards —as against how much he wants to consume in the present. The net resultant of all these voluntary individual decisions is the na­tion’s or world’s rate of capital investment. The total is a reflec­tion of the voluntary, free decisions of every consumer, of every person.The economist, therefore, has no business endorsing “growth” as an end; if he does so, he is injecting an unscien­tific, arbitrary value judgment, especially if he does not present an ethical theory in justification.He should simply say that, in a free market, everyone gets as much “growth” as he chooses to obtain; and that, furthermore, the people as a whole benefit greatly from the voluntary savings of others who do the saving and investing."He notado que un gran número de economistas aún los que se las dan de mas cientificos y alejados de ideologías, típicamente asumen que el "crecimiento económico" no es un valor mas sino que es algo deseado por TODOS los individuos dentro de una sociedad.

Saturday, March 07, 2009

"Somewhere between 1945 and 1975, the type of political construct known as the state and characterized, above all, by the separation between the ruler and the organization peaked and may have gone into decline. As previously, this process was not the making of individual rulers, however powerful and...benevolent. It was not as if the people at the top suddenly became less power-hungry or more willing to let the people at the bottom do their own thing. Once again, the well-nigh global character of the changes indicates that they were produced by anonymous forces over which scarcely anybody could exercise any control. And in relation to which, indeed, the entire question of morality becomes almost irrelevant.

Perhaps the most important factor, and one that is taken so much for granted that it is often overlooked, was the introduction and subsequent proliferation of nuclear weapons. For the first time in history, nuclear weapons permitted those who possessed them to annihilate each other and, of course, those who did not possess them as well. To date all attempts to change this fact by discovering some kind of antidote have failed; indeed they scarcely even got off the ground. Nor do I think that the current plans to build a ballistic missile defense system are going to make a difference in this respect. While this is not the place to argue the case in detail, against so-called "rogue states" such as North Korea, Iraq and Iran it is not needed. Against a first or even second class power with a full nuclear arsenal at its disposal it is useless.

The proliferation of nuclear weapons has affected war, and large scale war as waged by the state in particular, in two opposed ways. First, to the extent that the opponent also possessed a second strike capability it turned warfare into suicide, thus negating Clausewitz’s definition of it as a continuation of policy with an admixture of other means. It used to be that states went to war in order to extend or defend their interests. By definition, though, the interests of a state are less important than its existence--indeed it is only that which exists that can have interests in the first place. To put it in a less abstract way, it is hard if not impossible to think of an "interest" that will justify putting Washington D.C., or New York, or Moscow, or Beijing, or New Delhi, or Tel Aviv, at risk of instant and complete annihilation. As Bernard Brodie wrote as long ago as 1946, nuclear weapons cannot, should not, be used. If they have to be used, then they have already failed in their purpose which can only be to deter. As a result, whereas during the centuries before 1945 war was a major instrument used by states to increase their power at the expense of other states, since then it has been waged almost exclusively between, or against, non-nuclear states; in other words, such states as were not first or even second rate players in the international system.

The second reason why nuclear weapons have had a dampening effect on major interstate war is psychological. As the late Moshe Dayan once said, nothing is more exciting for men than war; as he well knew but did not say, nobody is more likely to command the admiration of women than warriors. In so far as nuclear weapons make it impossible to resist and can indeed eliminate entire societies in the twinkling of an eye, however, there is nothing exciting about them. By the speed with which it kills and destroys even more than by its sheer power, nuclear war simply does not offer any room for the exercise and display of such qualities as pride, honor, courage, determination, endurance, and self sacrifice. Briefly, it does not provide scope for heroism; whereas from the time that the first woman gave birth to the first baby (thus demonstrating to men how useless they really are) heroism has been what war is all about.

Concomitant with the retreat of major interstate war states also began dismantling some of the systems with which, since 1850 or so, they have built up in order to hold their populations in check and secure their loyalty. To a large extent, their doing so was a result of the Arab-Israeli conflict which brought on the Energy Crisis and plunged the world into a recession. Recession and unemployment overburdened the welfare system. This in turn led to inflation; and inflation in turn meant that the state had to rob some of its citizens in order to maintain payments to the rest. Even where rising oil prices did not constitute a major problem, Austrian economics--and here I agree with the ideas presented by the Mises Institute--would have predicted that the very success of the welfare state in creating more extensive education systems, more expensive health services, more old people, and more single mothers would cause its size to increase and its cost to skyrocket. By 1980 even Switzerland, that bastion of sound money, had a budget deficit amounting to more than 5 percent of GNP."

"For whereas the natural-rights libertarian seeking morality and justice cleaves militantly to pure princi­ple, the utilitarian only values liberty as an ad hoc expedient. And since expediency can and does shift with the wind, it will become easy for the utilitarian in his cool calculus of cost and benefit to plump for statism in ad hoc case after case, and thus to give principle away."